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More on REITs: Manager cautious on REITs

- Alan Lavine and Gail Liberman

Joe Betlej, manger of the Ivy Real Estate Fund, is cautious. He believes the REIT market will go through a correction. But long term, he expects REITS to return at least 11 percent annually.

"Any time you have strong moves either way, you are setting up for greater volatility," he said. "REITS were up sharply the first month of this year. Now there is a correction. It's expected in any investment when you start getting to historical levels of valuation."

As long as economic growth continues and borrowing rates are attractive, the public real estate market will remain cheap. So there will be more mergers with private companies. The downside: There are only limited universes of candidates that can be acquired.

Betlej says he is buying REITs on fundamentals, not on whether they will be merged or acquired. The fund's holdings are growing cash flows at a 9% annual rate and have high returns on capital compared to their peers. He favors companies that show strong growth and operate where supply is constrained by such factors as high new construction costs.

He likes upscale hotels that cater to business travelers and corporate users. These hotels can raise their room rates. Hilton Hotels is one of his largest holdings. The company merged with Hilton Group PLC, its international operating arm. Hilton now has one of the largest international portfolios in the hotel sector. The company sold off some properties last year. Sales and earnings are growing at 8% and 13%, respectively. The company is generating a high return on capital.

Betlej also likes regional malls, such as Forest City Enterprises. The REIT owns offices, apartments and regional malls. The company's earnings are growing at 12% annually and profit margins are 11%.

One of his recent acquisitions is BioMed Realty. The company provides laboratory space for pharmaceutical and biomedical industries. There is a nationwide shortage of laboratory space. BioMed Realty acquired 16 properties last year and expanded its laboratory rental space. Total revenue increased 59% and net income was up 105%. Earnings are expected to grow nearly 12% next year.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

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